The Treasurer cuts, but the big handouts flow to Labor's heartland

Surplus may go because of global uncertainties.
TO TRUE believers, the budget that Treasurer Wayne Swan unveiled last night will seem a classic Labor document: the cost of turning a $44 billion deficit in the present financial year into a $1.5 billion surplus next year is to be borne substantially by business, not households. To hardened cynics, however, this budget will have a very different pedigree, for it resembles nothing so much as the shrewd pork barrelling of the Howard era.

Surplus may go because of global uncertainties.

TO TRUE believers, the budget that Treasurer Wayne Swan unveiled last night will seem a classic Labor document: the cost of turning a $44 billion deficit in the present financial year into a $1.5 billion surplus next year is to be borne substantially by business, not households. To hardened cynics, however, this budget will have a very different pedigree, for it resembles nothing so much as the shrewd pork barrelling of the Howard era.

These different images are really two sides of a coin, of course. For despite the Gillard government's insistence that the return to surplus is an economic, not a political, target, the whiff of politics can be detected everywhere in this budget. Labor's miserable standing in the polls, with a primary vote stuck stubbornly below 30 per cent, makes it keenly aware of the voters it needs to win back to avoid disaster: those who were once Howard's battlers, then turned to Labor in 2007, and have been turning away again since 2010.

This swath of low-to-middle income earners will be the beneficiaries of the Schoolkids Bonus of $410 for primary students and $820 for secondary students, and of increases in Family Tax Benefit A of up to $600 a year for more than 1.5 million families. They are the people whose apprehensions over the impact of the carbon tax on their cost of living Labor needs to allay.

Whether these voters are as impressed by surpluses as the international markets and ratings agencies invoked by Mr Swan may be doubted. By keeping the government's post-global financial crisis pledge to return to surplus in 2012-13, however, the Treasurer and Prime Minister Julia Gillard can insist that they have kept their word. That matters not only because it allows Mr Swan to refute triumphantly the taunt of his opposition shadow, Joe Hockey, that "Labor can't deliver surpluses. It's not in their DNA." For this government, the fact that it has delivered on a promise matters even more because the voters' confidence in the government's trustworthiness has been steadily eroding since Ms Gillard announced the carbon tax, which she had previously sworn would not be introduced.

So Mr Swan can declare that Mr Hockey is a false prophet, while doing whatever he can to shore up Labor's vote and all the while insisting that the surplus demonstrates the government's fiscal probity. Shorn of the political context, however, whether the headlong rush from the red to the black is worth the risks involved remains open to question.

In November last year, The Age warned that the prospect of the budget remaining in deficit a little longer would not be a problem. What the government might do to avoid that prospect, however, could well be a problem. And nothing in this budget has reassured us on that point.

The 3.25 per cent growth and the associated revenue flows projected in the budget papers may turn out to be an assumption built on air if Europe's continuing debt crisis and new political instability trigger a second global recession. The government will have to hope that incoming French president Francois Hollande is vindicated in his belief that policies aimed at fostering growth rather than austerity are the best cure for Europe's economic woes. If he is, the irony will be that dangers in Australia's own dose of austerity will have been lessened by growth abroad.

To achieve its very modest surplus, the government has had to slash spending by more than $33 billion. Some of the cuts, such as the $5.4 billion to be trimmed from outlays on defence over the next four years, are surely justifiable. Australia's overseas deployments are coming to an end, and in any case the defence force should not be insulated from wider budget strategies.

Other savings, such as the cancelled cuts in company tax that will retain $316.6 million in 2012-13 and a total of $4.7 billion by 2016, are politically shrewd. Business leaders may howl, but this particular broken pledge will cost few votes. The government can argue, too, that the measures it has tagged "spreading the benefits of the boom" and other payments to families will have a stimulatory effect, particularly in south-eastern Australia, which has languished under the boom and the high dollar.

The Treasurer could not cut spending sufficiently to achieve a surplus only by playing Robin Hood, however. Education, a traditional Labor priority, receives very little in new outlays in this budget. The Prime Minister seems to have walked away from the education revolution of which she was once so proud. And the government's commitment to increase foreign aid to 0.5 per cent of gross national income by 2015 has been deferred, a decision that will inevitably cause suffering among those who would have been its recipients. Nor are the changes to superannuation all good news. The guarantee rate will rise to 12 per cent as promised, but for the next two years Australians over 50 with less than $500,00 in their super accounts will be able to save only $25,000 a year, not $50,000 a year as at present.

To offset all these stings, the government can cite the introduction of what it rightly describes as the most fundamental welfare reform since the introduction of Medicare, the creation of the National Disability Insurance Scheme. If global economic uncertainties or domestic woes mean that the government's political gamble in this budget comes to naught, the scheme may be the one enduring feature of this budget. It would be no small legacy.

IMPORTANT: This information has been prepared without taking into account your objectives, financial situation or needs and you should consider if the information is appropriate for you before making an investment decision. Unless otherwise specifically stated or disclosed (such as the InvestSMART Diversified Portfolios Product Disclosure Statement), neither InvestSMART Financial Services Pty Ltd nor any of its Related Companies make any recommendations as to the merits of any investment opportunity referred to in its emails or its related websites. Product disclosure statements for financial products offered through InvestSMART can be downloaded from this website or obtained by contacting 1300 880 160. You should consider the product disclosure statement before making a decision about the product. All indications of performance returns are historical and can not be relied upon as an indicator for future performance.